The Flat-Fee Revolution: Is Billable Time a Dying Business Model?

Online legal services are popping up everywhere, and billing in six-minute units is a waning practice. Instead, establishing a set fee for legal services is on the rise. So is the flat-fee revolution upon us? If so, which direction should Australian legal practitioners take in order to keep clients happy and improve their bottom line?

A move away from billable hours

The 2013 King & Wood Mallesons Compass Report found that the shift away from billable hours is gaining momentum, with fixed and capped fees the most common change to the way organisations brief external counsel. Legal practice management consultant Rob Knowsley of Knowsley Management Services says the fixed-fee approach will continue to grow as clients demand certainty.

“Fixed fees are expanding their application in the marketplace,” he says. “There is a growing trend away from time recorded as one of the principal methods of setting fees.”

And according to Linda Julian of Julian Midwinter & Associates, in order to benefit from fixed fees you need a certain volume of work as well as good management systems, standardised processes and discrete projects with definitive conclusions. If these criteria are satisfied, the fixed-fee approach works well.

Fixed fees, however, are only one of many alternative billing arrangements. Proactive firms are looking at methods such as:

  • Retainer fees.
  • Blended hourly rates.
  • Discounted fees.
  • Budgeted cap on fees.
  • Contingency fees or percentages.

So what are the major reasons behind the move away from billable time?

Client satisfaction and demands for more transparent and predictable invoicing are among the top causes.

“The drivers are varied but the need for firms to be perceived as client focused and to increase the chances of keeping or getting more desirable clients in the face of proactive and adaptive competitors has to be front and centre,” says Knowsley.

Beware of getting it wrong

While some clients crave certainty, others recognise there are “genuine factors well beyond the control of lawyers that may warrant a higher fee or agreed additional charge beyond a fixed fee”. The key is to communicate effectively, set realistic expectations and be prepared to adapt when it comes to fee agreements.

Inaccuracy and underestimation of time

Research* suggests close to 56 per cent of lawyers in small and mid-sized practices underestimate their time, while 44 per cent inaccurately record time. Knowsley believes it’s a common problem that impacts greatly on law firms.

“It can mean a significant proportion of the fee a client may otherwise have paid will not even be billed.” That ultimately means lower revenues and decreased profits.

The online trend

The growth of online legal services will impact smaller firms in particular because they tend to offer a similar range of services. “Many will fall into the trap of thinking they need to match the online prices, forgetting the different overhead structures that usually exist.”

Not all clients are price driven, however. Knowsley recommends small firms take stock of what clients want and work out how to deliver a quality service at a higher price. Add value, listen to the client and create a point of difference.

Be commercial

Reassessing old-fashioned payment methods could also improve your profitability. “Limited payment arrangements can force clients with a temporary incapacity to pay to look for a cheaper option.” As structural change continues apace in the legal sector, firms will need to find innovative new ways of charging that work for themselves as well as their clients.

 

Sources

  • King & Woods Mallesons (2013) Compass Report
  • Julian, L. (2013) Alternative Fee Arrangements
  • * Thomson Reuters technology and efficiency insight survey, August 2013

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